Re-Looking Value Investing

I have been reading Howard Mark’s earlier book ” The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor” and his latest book “Mastering the Market Cycle: Getting the Odds on Your Side” lately.  First off, I would strongly recommend that all investors read both books.  It is the culmination of Mark’s 40 years of investment experience.  I find the first book especially relevant as it encapsulates higher level investment thinking perfectly in its manifold complexity and subtlety.  It is certainly thought provoking to read it now again as we enter into another period of turbulence and possible major correction in the markets.  It definitely helped me put all the current stock market volatility in context.  Incidentally, I had also been re-reading Benjamin Graham’s classic “The Intelligent Investor”.  Maybe because I’m getting on in age but now reading this classic again, I find the many examples given by Graham to be so relevant today even though he was talking about stocks in the 1960s and 70s and those decades before that.

In the same spirit, I have taken a re-look at Asian stocks.  I must say that to my surprise and bafflement, some of the stocks that I had previously not looked at or even considered, seem to offer quite a bit of “value”.  Here are some stocks to ponder about:

  1. China Machinery Engineering (1829 HK)China Machinery Eng FA

This stock is one of the greatest investment conundrum in my investing career so far.  Can a stock really be traded so cheap consistently?  As of 30 Jun 2018, according to Bloomberg’s data, the stock has cash worth USD4.2bn on balance sheet and debt (and related) of USD193m and a market cap of only USD1.9bn currently?!  This gives the stock a negative Enterprise Value (EV) of ~USD2bn!!  Ok I admit, this is the first time I have seen an example of a stock that is traded at a negative EV.  The most puzzling thing is this: that the stock has consistently traded below its net cash per share since 2014.  Indeed, it’s value had not prevented it from being further derated by the markets this year as its negative EV swelled from USD780m last year to USD 2bn currently.  What could have caused this to happen?  Isn’t it cheap enough for a stock to be traded below its net cash per share?  Isn’t that a big enough margin of safety?  Any investor thinking so would have lost money in the stock since 2014!  This is a sobering thought for many value investors and one for me to remind myself of.

This reminds me of another stock that I have looked at a long time ago called Hankuk Electric Glass listed in Korea but was subsequently privatised by its majority shareholder Asahi Glass in 2011.  It was the first time I had encountered a stock that was traded so close to cash per share.  The market cap at the tender offer price priced the company at ~KRW477m at that time, hence it was just a mid cap company back then.  Of course it was in a pretty unattractive industry at that time, producing glass tubes for CRT TV at that time.  Lousy sunset industry but generating good enough cash.  Enough at least for Asahi Glass to take it private at a EV/EBITDA valuation back then of 4x.  In this case, the case for value investing was upheld as stock was taken over at a premium of ~35% of last traded stock before the announcement.

2. Weiqiao Textile (2698 HK)

weiqiao-fa.gif

Weiqiao Industry is the other stock that I noticed that trades at a negative EV.  Cash on balance sheet of USD13 bn and debt of USD7bn which means a net cash of USD6bn.  The stock is now trading at a market cap of USD2.7bn??  Note that this is not a small/mid cap either.   If you look at the Historical Price to Book ratio of this company, it is absolutely baffling.  The stock spends most of its time below 0.4x PBR.  Indeed, it is currently trading at 0.15x!  This is not too far away from its GFC low of 0.12x.  Sure, the textile industry is not a very sexy industry but to trade at these valuations??

weiqiao-pbr.gif

 

3. Tencent & MGM China

These 2 are not exactly value stocks but I happened to look at their PBRs this week and lo and behold, they are now trading below their GFC lows!  So is the current situation as bad as it was in 2008?  Maybe I’m really wrong but it certainly doesn’t feel this way to me!

tencent-pbr.gifmgm-china-pbr.gif

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During the current market correction in Asia, it certainly feels that the crisis hasn’t shown any signs of slowing down.  In fact, if anything, investors are just seeing companies reporting their first set of quarterly results since the Sino-US Trade war.  It seems increasingly likely that the Trump might continue to escalate it further.  The US market is also starting to break below their 200 day ma this last week.  If this is the beginning of a long overdue market correction in the US, it is unlikely that emerging markets will escape unscathed.  So are we headed for a crisis worse than the GFC in 2008?  I am not sure but certain stocks are already priced at those levels with quite a few stocks already trading at below net cash levels.  Let’s see how future events unfurl.

 

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